Federal Court Limits but Does Not Dismiss CFPB’s MLA Suit Against FinTech Company

A federal judge for the U.S. District Court for the Southern District of New York recently ruled on a motion to dismiss the CFPB’s suit against a national fintech company and its subsidiaries, which alleged that the Company’s practices violated the Military Lending Act (MLA) and the Consumer Financial Protection Act’s (CFPA’s) ban on unfair, deceptive and abusive practices.  The court did not dismiss the Bureau’s suit, but found that the underlying complaint did not plausibly allege the Company’s arbitration clause or disclosures violated the MLA.

The Bureau’s initial complaint, filed in September 2022, alleged the Company violated the MLA by overcharging military borrowers for online loans, charging more than the 36% cap on the annual percentage rate of interest for military service members, referred to as the “military annual percentage rate” (MAPR).  Further, the complaint alleges the Company failed to make loan disclosures to covered borrowers required under the MLA and the CFPA and acted deceptively and abusively by not allowing consumers with unpaid loans to cancel their memberships with the Company, instead continuing to charge these borrowers monthly membership fees.  The Complaint also alleged violations of the MLA by requiring borrowers submit to arbitration and by failing to make required disclosures.

The Company argued that the CFPA unconstitutionally delegates legislative authority to the Bureau. The Company also argued that the Department of Defense’s 2015 rule implementing the MLA, which specified which elements should count towards the 36% cap on consumer credit, is invalid under the APA because including participation fees in the calculation of the 36% is inconsistent with the MLA and is arbitrary or capricious.

The Court held that the CFPA’s grant of power to the CFPB to bring civil actions is not a delegation of legislative power, so does not implicate the non-delegation doctrine.  In addition, the Court held that the DOD’s inclusion of participation fees in the calculation of the MAPR is not inconsistent with the MLA.  However, the Court agreed with the Company that the CFPB had not plausibly alleged violations of the MLA concerning the Company’s arbitration requirements and disclosures.